Partner Article

Private equity interest in luxury brands

James Goold, a partner in the private equity team at international law firm Taylor Wessing, considers the private equity sector’s interest in the luxury goods market.

It may seem anomalous when consumer spending remains generally depressed, courtesy of macro-economic conditions, that the luxury goods market has remained comparatively resilient. There have, of course, been victims (think Jaeger and Acquascutum…), but the sector continues to attract investment, in particular from private equity.

For a start, well managed luxury brands often achieve higher valuation multiples than regular consumer goods companies, given their propensity for greater customer loyalty, so each pound of earnings growth potentially converts into more value for investors when it comes to exit. And with less leverage generally available, the private equity community is having to work its assets harder than ever to create that value.

Those companies with luxury brand appeal can be ripe with value creation prospects. Periods of private (often family) ownership may have constrained exploitation of the key growth opportunities, including those arising from globalisation and digitalisation of sales strategies. Private equity can provide not only the investment needed to take a company from one stage to the next, but also the necessary expertise in overseas expansion and implementation of new routes to market.

Whilst it is those skills that appeal in particular to founder-managers, and other “custodians”, of luxury brands, the apparent symbiosis between investor and investee can be difficult to achieve in practice. Even where brand creators or custodians recognise the need for external investment and strategic guidance, and indeed may even want to realise some of their own investment, they can nevertheless struggle to relinquish control - a symptom of the passion that led to the brand’s success. That sits at odds with private equity investors who are used to enjoying high levels of control, including rights to assume absolute management of investments if they start to turn sour (known as “swamping rights” which are triggered if certain financial under-performance thresholds are crossed).

This dynamic can lead to investors acquiring minority stakes in these companies (whereas buyout houses prefer to have majority ownership). There, the investor’s contractual and legal controls are pared back and the investment’s success will greatly depend on the investor’s skills in relationship management when the investor’s and the founder’s strategic objectives diverge.

Jimmy Choo demonstrates the step changes that private equity ownership can bring about. Before it was sold to Labelex (owner of Bally, Belstaff and Zagliani) in 2011 for over £500 million, it was owned by Towerbrook Partners (who acquired it in 2007 for £225 million), Lion Capital, a specialist investor in consumer goods (who acquired it in 2004) and Equinox Luxury Holdings. Over the period of private equity ownership, which included the eye of the global economic storm, it achieved annualised growth exceeding 30 per cent.

Such is the attraction of luxury brands that successful consumer goods companies have become venturers in their own right, adopting a private equity style approach. Fung Capital Europe, the investment division of Li & Fung Group, has invested in Sonia Rykiel, Clergerie, Delvaux and Hardy Amies, all of which it is helping grow through, amongst other things, using its own extensive distribution networks.

So, private equity focus on luxury goods is likely only to intensify but investors may find it an increasingly competitive space to occupy.

This was posted in Bdaily's Members' News section by Taylor Wessing .